1. Field of the Invention
This invention generally relates to reverse auctions, and more particularly to a system and method for selecting a bid in a multi-bid reverse combinatorial auction.
2. Description of the Related Art
Strategic sourcing relates to the procurement of direct inputs used in the manufacture of a firm's primary outputs. These procurements are usually very large, both in quantity and dollar value. For example, the primary inputs for manufacturing computers include processors, RAM (random access memory), hard drives, monitors, etc. In the computer industry especially, it has been determined that up to 90% of a company's expenditures relate to procuring direct inputs, and therefore it is clear that in order to optimize efficiency and productivity a company's strategic sourcing initiatives must be executed with business acumen.
Practically speaking, the total quantity of direct inputs that needs to be procured is based on a forecasted demand for a planning horizon, which typically corresponds to a fiscal quarter. Since there is considerable uncertainty in the forecast, strategic decisions are usually made regarding the fraction of the forecast demand that must be procured up front. The demand fluctuation over the base level (which is obtained using a long-term contract) is procured on a weekly basis in most cases. However, short-term demand is usually much smaller and there is therefore less room for price negotiations.
A fundamental concern in making sourcing decisions is related to the reliability of suppliers, because defaulting suppliers might have considerable impact on the firm's ability to satisfy demand obligations. As a result, conventional forms of price negotiation have generally been confined to a small number of pre-certified suppliers that have established relationships with the company.
In effort to improve strategic sourcing in the business community, special price negotiation schemes that incorporate appropriate business practices have been employed. A reverse auction is an example of such a price negotiation scheme. Reverse auctions aggregate short-term (e.g., weekly) demand over direct inputs across multiple manufacturing plants in an effort to increase the total transaction size. As such, they have proven beneficial to both parties.
On the one hand, reverse auctions allow suppliers to provide all-or-nothing bids for bundles of direct inputs. As a result, suppliers may exploit cost complementarities for different commodities or locations, e.g., complementarities. This, in turn, allows suppliers to provide lower prices on commodity bundles, which inures to the benefit of the buyer. All-or-nothing bids also provide a way for buyers to procure a variety of commodities simultaneously, thereby saving time and money. Auctions of this type are known as “reverse combinatorial auctions.”
A fundamental consideration that arises in the price negotiation schemes is the incorporation of business rules in the process of selecting winning bids. Conventionally, the price quotes offered in reverse combinatorial auctions are for the entire bundle and thus the entire bundle must be chosen, no part thereof. This makes the problem of identifying the cost-minimizing set a difficult optimization problem. (The “cost-minimizing set” corresponds to, for a given set of bids, a subset of bids such that the demand for all the items is satisfied and cost is minimized.)
In view of the foregoing considerations, it is apparent that there is need for an improved system and method for selecting bids in a reverse combinatorial auction, and more particularly one which selects the optimal bid when commodities are offered in bundles.